Schwab Pre-earnings: Asset Growth And Trading Volumes In Focus

Charles Schwab (NYSE:SCHW) is scheduled to report its earnings for Q3 on October 15. Last quarter, the brokerage firm’s net revenue grew 4% year-over-year to reach $1.34 billion. All major divisions contributed to revenue growth as asset management fees, net interest revenue and trading revenue were up year-over-year by 15%, 3% and 7%, respectively. Asset management fees were driven by increases in average client assets across Schwab’s product lines, while the growth in net interest revenue was primarily due to higher average balances in interest earning assets. Trading revenue was up on the back of a 24% year-over-year increase in daily average revenue trades (DARTs).

This quarter, we expect more of the same as the brokerage continues to attract new client assets. The trading business also seems to be healthy as DARTs have remained above the 450,000 mark for all of this year. Our price estimate for Schwab’s stock is currently around $18 per share, 15% below the market price. We will update our estimates once the company releases its earnings.

In line with its historical performance, Schwab continues to attract new client assets at a rapid rate. In July, it attracted around $9 billion in net new assets. In August, the company reported a $2.4 billion decline in assets; however, this was due to a one-time impact of a restructuring in the company’s retirement record keeping business. The company actually attracted around $22 billion in core new assets (net new assets before significant one-time flows) in August 2013.

We expect Schwab to continue attracting client assets at a rapid pace in the coming years and to double its total client assets to almost $4 trillion by the end of this decade. Growing assets are likely to improve Schwab’s asset based revenues – those from net interest income and asset management fees.

Overall Trading Volumes Are Also Gradually Improving

Trading volumes have remained low throughout the brokerage industry for some time now, but are beginning to gradually recover. Schwab’s daily average client trades increased year-over-year by 26% and 24% in July and August, respectively. The increase comes from both an increase in brokerage accounts as well as an increase in the average number of trades executed by a typical brokerage client.

We expect Schwab’s overall trading volumes to gradually improve in the coming years as existing clients start to trade more often and as the company continues to attract new brokerage accounts.

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